Investing
How To Calculate Dividend Income
Dividend income is the easiest investment return to picture, because it arrives as cash on a date you can see. That makes it the easiest to over-count as well.
Quick Answer
annual income = shares x dividend per share; yield = dividend per share / price
- N
- Number of shares held
- DPS
- Annual dividend per share
- y
- Dividend yield, dividend per share divided by price
- g
- Assumed annual growth in the dividend per share
200 shares paying £6.20 a year on a £100 price is a 6.2% yield and £1,240 of income in year one. Growing at 5% a year, year ten pays £1,923.65 and the ten-year total is £15,596.59.
What Is Dividend Income?
A dividend is a distribution of a company's profit to its shareholders, paid in cash or in additional shares. The income it produces is the simplest investment return to measure, because it does not depend on a price at all.
Dividend yield is the annual dividend per share divided by the share price. A £6.20 dividend on a £100 share is a 6.2% yield, and the yield changes whenever the price changes even though the dividend does not.
Yield is therefore a moving target in a way that a coupon is not. If the dividend stays at £6.20 and the price falls to £80, the yield rises to 7.75% without a single payment changing.
Annual income is shares multiplied by dividend per share. It does not depend on the price at all, which is why a falling market is not a problem for an income investor but a rising one is a disappointment.
Dividends are not guaranteed. A company can cut, suspend or raise them at any time, and the boards that promise the highest yields are often the ones with the least room to keep the promise.
A high yield is frequently a warning rather than a reward. A falling price with an unchanged dividend produces a rising yield, and the market may be pricing in a cut that the headline figure hides.
Payout ratio is the check on sustainability. It is the share of profit paid out as dividends, and a ratio well above 100% means the dividend is being funded from reserves rather than from earnings.
Dividend growth compounds in a way that the yield alone hides. A 5% growth rate doubles the dividend roughly every fourteen years, so an income stream that looks modest in year one is far larger by year ten.
The total over a horizon is a growing annuity rather than a fixed one. Each year's payment is the previous year's payment times one plus the growth rate, and the sum of that series has a closed form.
Reinvestment is what turns income into wealth. Taking the cash spends the return, while reinvesting buys more shares, which pay more dividends, which buy more shares, and the cycle compounds in the background.
The UK and most jurisdictions tax dividends, and the rate depends on the band rather than on the type of account. A basic-rate payer and a higher-rate payer receive the same cheque and keep very different amounts.
Tax treatment also differs between wrappers. Dividends received inside an individual account and inside a tax-free wrapper are the same cheque, but only one of them is reduced by tax.
The ex-dividend date decides who receives a payment. Buying the day before it entitles the buyer to the dividend, and buying on the day after does not, which briefly moves the price down by roughly the amount paid.
The calculator reports the yield, the income in the first year and the last, the total over the horizon at an assumed growth rate, and the total after tax. It assumes the share count and the dividend per share stay constant apart from the growth rate.
Formula
yield = dividend per share / share price
The annual dividend per share divided by the current price gives the income return as a percentage of the purchase price.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| DPS | Dividend per share | currency | Annual dividend for one share. |
| P | Share price | currency | The price paid for the share. |
| y | Yield | percent | The income return as a share of the price. |
annual income = shares x dividend per share
Multiply the number of shares by the annual dividend per share. The price paid is irrelevant to the income and matters only to the yield.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| N | Shares | shares | How many shares are held. |
| DPS | Dividend per share | currency | Annual dividend for one share. |
| I | Annual income | currency | Total cash received from dividends. |
total = income x ((1+g)^n - 1) / g
With the dividend growing each year, the income stream is a growing annuity. Summing it gives the closed form shown, and the result grows quickly with the horizon.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| I | Year-one income | currency | The dividend income in the first year. |
| g | Growth rate | percent | Assumed annual growth in the dividend. |
| n | Years | years | How many years income is counted for. |
| T | Total income | currency | The sum of every year's payment. |
How To Calculate Dividend Income
- 1
Divide the dividend by the price
A £6.20 dividend on a £100 share is a 6.2% yield. The same dividend on a £155 share is a 4% yield, because the yield measures income against what was paid.
- 2
Multiply by the number of shares
Shares times dividend per share gives the cash in year one. This figure is independent of the share price and only moves when the count or the dividend changes.
- 3
Grow the dividend for the horizon
Raise one plus the growth rate to the number of years minus one and multiply. With 5% growth the tenth year is about 55% larger than the first.
- 4
Sum the growing stream
Use the growing-annuity formula to add up every year from the first to the last. This total is much larger than ten times the first year once the growth rate is meaningful.
- 5
Apply the tax rate
Multiplying by one minus the tax rate gives the amount kept. Do this last, because the tax applies to every year's payment including the larger later ones.
Examples
Example 1: 200 shares at £100 paying £6.20
- Shares
- 200
- Share price
- £100
- Annual dividend per share
- £6.20
- Dividend growth
- 5%
- Years
- 10
- Tax rate
- 15%
| Step | Calculation | Result |
|---|---|---|
| Dividend yield | £6.20 / £100 | 6.20% |
| First-year income | 200 x £6.20 | 1240 |
| Final-year income | £1,240 x 1.05^9 | 1923.65 |
| Ten-year total income | £1,240 x 12.578 | 15596.59 |
| After 15% tax | £15,596.59 x 0.85 | 13257.10 |
Result: 200 shares paying £6.20 on a £100 price give a 6.2% yield and £1,240 in year one. With 5% annual growth the final year pays £1,923.65 and the ten-year total is £15,596.59, which is £13,257.10 after 15% tax.
Example 2: 500 shares at £120 paying £4.50 over twelve years
- Shares
- 500
- Share price
- £120
- Annual dividend per share
- £4.50
- Dividend growth
- 3%
- Years
- 12
- Tax rate
- 15%
| Step | Calculation | Result |
|---|---|---|
| Dividend yield | £4.50 / £120 | 3.75% |
| First-year income | 500 x £4.50 | 2250 |
| Final-year income | £2,250 x 1.03^11 | 3114.53 |
| Twelve-year total income | £2,250 x 14.192 | 31932.07 |
| After 15% tax | £31,932.07 x 0.85 | 27142.26 |
Result: 500 shares at £120 paying £4.50 give a 3.75% yield and £2,250 in year one. With 3% growth the final year pays £3,114.53 and the twelve-year total is £31,932.07, or £27,142.26 after 15% tax.
Calculator
Dividend yield
6.20%
- Income in year one
- $1,240.00
- Income in the final year
- $1,923.65
- Total income over the horizon
- $15,596.59
- Total after tax
- $13,257.10
- Average per month
- $129.97
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the Dividend Income calculator page.
Common Mistakes
Reading a high yield as a good dividend
A yield that has risen because the price fell often means the market expects a cut. Check the payout ratio before treating a high yield as durable income.
Counting the yield on a price you did not pay
A 6.2% yield on a £100 share is a 4% yield on the same dividend bought at £155. The yield is a function of the purchase price, not a property of the share.
Assuming the dividend is guaranteed
Dividends are declared by a board and can be cut or suspended at any time. A yield is a statement about the past and the current intention, never a promise about the future.
Ignoring the payout ratio
A company paying out more than it earns is funding the dividend from cash reserves. That is sustainable for a while and then it is not.
Adding the dividend to the share price return without care
Total return is the dividend plus the price change, but the price drop on the ex-dividend date already reflects the payment. Counting both double-counts the same cash.
Using the gross figure for a taxable account
The cheque is gross and the tax bill is real. Applying the tax rate to every year's payment, including the larger later ones, gives the figure that matters.
Forgetting that the share count is the dividend multiplier
Two people with identical yields can have very different incomes because one holds four times the shares. The yield describes the asset and the count describes the portfolio.
FAQ
What is a good dividend yield?
It depends on the market and the sector, but broadly 2% to 4% is typical for a large established company and much higher for some specialist or riskier sectors. A yield far above the market average is usually a sign that the dividend is expected to fall.
Is dividend income better than capital growth?
It is not better, it is different. Dividend income is received without selling anything, while capital growth is only realised on sale. A total-return investor can manufacture the same cash flow by selling shares when needed.
How often are dividends paid?
Quarterly is the most common schedule for large companies, with semi-annual and annual payment common elsewhere. The frequency does not change the annual total but it does change when the cash arrives.
What is the ex-dividend date?
It is the date on which a new buyer stops being entitled to the next dividend. Buying before it entitles the buyer to the payment, and buying on or after it does not, which is why the price usually drops by roughly the dividend on that date.
Are reinvested dividends taxed?
Usually yes, in a taxable account. Taking the cash and reinvesting it, or enrolling in a dividend reinvestment plan, both leave the tax liability in place. A tax-free wrapper removes it.
How does dividend growth change the total?
A great deal. At 5% a year the dividend roughly doubles every fourteen years, so the total over ten years is about twelve and a half times the first year's payment rather than ten times it.
References
- [1]U.S. Securities and Exchange Commission, Dividends and payout ratios — https://www.investor.gov/introduction-investing/investing-basics/glossary/dividends
- [2]Financial Industry Regulatory Authority, Dividend yield and payout ratio — https://www.finra.org/investors/learn-to-invest/types-investments/stocks/dividend-yield
- [3]Bank of England, Reported earnings and dividend distributions — https://www.bankofengland.co.uk/explainers/how-are-interest-rates-set